Housing Bailouts: Letting the Chips Fall

While politicians debate various plans to rescue our ailing real estate and mortgage markets, some experts oppose any artificial life support that could potentially disrupt the natural forces of our free market system. They argue that such manipulation got us into this mess in the first place.

The Senate Banking Committee was scheduled to debate, and possibly vote on, a major housing bill in mid-May. The proposal, sponsored by Christopher Dodd (D-CT), has been in the works for several weeks. But many Republicans are against it, and President Bush has said that he will veto it. Dodd's bill would let the Federal Housing Administration (FHA) insure mortgages and refinance loans of at-risk borrowers. Republicans oppose the idea, arguing that it puts taxpayer money at risk, and rewards speculators. Democrats argue that letting homeowners refinance into safer loans is smart policy, and that the cost is small potatoes compared to the Bear Stearns bailout. It could potentially revive the entire economy-a powerful return on a relatively small investment.

Letting nature take her course

Meanwhile, some economists oppose any kind of bill that tampers with the natural dynamics of our free market system. Market equilibrium is delicate, and many think that artificial manipulation is a bad idea that led to the current mortgage finance and housing crisis. Rather than bolster the housing market, they believe that it's better to rely on normal supply and demand factors to make natural corrections as the chips fall where they may-even if it leads to a painful recession.

Letting the Fed take its course

The Fed, on the other hand, appears to have a different philosophy. Chairman Ben Bernanke hopes that a series of drastic rate cuts, plus a $168 billion economic stimulus package that includes taxpayer rebate checks, will stave off recession and bolster the economy. But some pundits, analyzing the Fed's response to the last U.S. recession, believe that it was this same brand of dramatic tinkering and meddling that weakened the markets and ushered in our current crisis. They point out that rates were slashed to get us out of the recession at the beginning of this decade, and that inspired borrowing and stimulated the economy. But it also led to one of the lowest savings rates in our nation's history, as consumers went on a borrowing, refinancing, and buying binges, driving up home prices and creating an artificial real estate "bubble" that burst.

In the past, the markets punished consumers severely when they ignored their budgets and tried to live far beyond their means. But most people prefer to get their reality checks from television reality shows, not from sacrificing a comfortable lifestyle, let alone their homes. Plus, the more sophisticated that economic tools become, the better Americans can adroitly tweak markets to their own advantage. But micro-managing the housing market could have catastrophic consequences, and lead to a financial version of global warming, if there's too much tinkering with the fundamental laws of financial and monetary gravity.